Human Capital Flashcards
Given concerns about ability and selection bias, how can we estimate returns of schooling?
in lectures we have focused on ‘mature students’ who have worked before attending school
- compare pre- and post-schooling earnings for these individuals which is known as ‘person fixed effects’ model
- focus on vocational education e.g. apprenticeships
Failing to take account of ability bias causes us to overstate the returns of earnings. True or False?
True
Failing to take account of selection bias causes use to understate returns to schooling. True or False?
Neither - It’s unclear whether the return is too high or too low
What will training lead to?
An increase in the marginal product of the workers receiving the training
What are the two types of training?
- General training: teachers the workers skills that are useful in all firms e.g., word processing, truck driving
- Specific training: teaches the worker skills that are only useful in a single firm e.g., learning to operate firm-specific equipment/software
What does K stand for in the graphs for training?
training costs
What is ability bias?
unobserved differences in ability
- people either have more or less of the skill
What does ability bias usually lead to?
overstating the returns of schooling
When does estimating returns to schooling become even harder?
If wage-schooling loci cross
What is selection bias?
Individuals selecting the optimal occupation based on their talents
What is the estimated return to schooling of selection bias?
Unclear if estimated return is too high or too low
What are the differences between Ability bias and Selection bias
Ability Bias:
- one type of skill
- people either have more or less of the skill
Selection Bias:
- Different types of skills
- People have different amounts of each type
- Different jobs require different types of skills
Wage-Schooling Locus Properties
- Upward sloping
- Concave
- Slope shows increase in earnings with an additional year of school: this increase in earnings is the marginal rate of return to schooling
How do we estimate returns if individuals have different wage-schooling loci?
For most people, we only observe one level of schooling
What is the wage-schooling locus
shows how earnings vary with the years of schooling
What are the factors affecting education decisions?
- Age
- older individuals are less likely to go to school
- fewer periods in which to receive benefits
- higher forgone earnings - The discount rate r
- Higher r means less likely to go to school
- future earnings are worth less
- individuals place a higher value on current consumption
- Value of r can be related to other behaviour such as smoking - Future earnings differential
- Larger differential = higher return to schooling
- Smaller (lower) differential = less likely to go to university when differential is lower - Changes in direct cost of schooling and foregone earnings
- probability of going to school is related to cost of tuition
- university is counter-cyclical
Larger future earnings differential leads to higher/lower return to schooling
= higher return to schooling
How do you calculate what stuff in the future is worth today?
Divide
How do you calculate what something today is worth in the future
multiply
What approximately are returns to schooling in the developed world?
Around 10% per year
-> Accounts for ability and selection bias
What are the returns of schooling in less developed countries?
Almost 40%
Smaller future earnings differential leads to higher/lower return to schooling
less likely to go to university
What are the two types of training?
- General training - teachers the workers skills that are useful in all firms e.g., word processing, truck driving
- Specific training - teaches the worker skills that are only useful in a single firm e.g., learning to operate firm-specific equipment/software
What does K stand for in training graphs
K = training costs
